This Annual Report includes "forward-looking statements" within the meaning of the federal securities laws, particularly statements referencing our expectations relating to the productivity of our sales force, revenues, deferred revenues, cost of revenues, operating expenses, stock-based compensation and provision for income taxes; the growth of our customer base and customer demand for our products; the sufficiency of our cash balances and cash flows; the impact of recent changes in accounting standards; the impact of changes in the tax code as a result of recent federal tax legislation and uncertainty as to how some of those changes may be applied; market risk sensitive instruments; contractual obligations; and assumptions underlying any of the foregoing. In some cases, forward-looking statements can be identified by the use of terminology such as "may," "will," "expects," "intends," "plans," "anticipates," "estimates," "potential," or "continue," or the negative thereof, or other comparable terminology. 72 -------------------------------------------------------------------------------- Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, these expectations or any of the forward-looking statements could prove to be incorrect, and actual results could differ materially from those projected or assumed in the forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to risks and uncertainties, including but not limited to the factors set forth in this Annual Report under Part I, Item 1A. Risk Factors. All forward-looking statements and reasons why results may differ included in this Annual Report are made as of the date of the filing of this Annual Report, and we assume no obligation to update any such forward-looking statements or reasons why actual results may differ.
The following discussion should be read in conjunction with our consolidated financial statements and notes thereto appearing in Part II, Item 8 of this Annual Report.
Overview
We are a global medical device company focused on providing innovative products that improve the quality of life of patients suffering from chronic pain. We have developed and commercialized the Senza spinal cord stimulation (SCS) system, an evidence-based neuromodulation platform for the treatment of chronic pain, and recently launched our newest product platform, Senza® Omnia™. Our proprietary paresthesia-free HF10 therapy, delivered by our Senza system, was demonstrated in our SENZA-RCT study to be superior to traditional SCS therapy, with HF10 therapy being nearly twice as successful in treating back pain and 1.5 times as successful in treating leg pain when compared to traditional SCS therapy. Comparatively, traditional SCS therapy has limited efficacy in treating back pain and is used primarily for treating leg pain, limiting its market adoption. Our SENZA-RCT study, along with our European studies, represents what we believe is the most robust body of clinical evidence for any SCS therapy. We believe the superiority of HF10 therapy over traditional SCS therapies will allow us to capitalize on and expand the approximately$2.5 billion , pre-COVID-19 pandemic, global SCS market by treating both back and leg pain without paresthesia. We launched Senza commercially inthe United States inMay 2015 , after receiving a label from theU.S. Food and Drug Administration (FDA) supporting the superiority of our HF10 therapy over traditional SCS. The Senza system has been commercially available in certain European markets sinceNovember 2010 and inAustralia sinceAugust 2011 . We have experienced significant revenue growth inthe United States since commercial launch. Senza is currently reimbursed by all of the major insurance providers. In early 2017, we commenced a controlled commercial launch of our family of surgical leads, marketed as the Surpass surgical lead, and inApril 2020 received FDA approval for our reduced-size Surpass-C surgical lead. InJanuary 2018 , we received FDA approval of our next generationSenza II SCS system. In the fourth quarter of 2019, we received FDA approval of our next generation product platform, Senza Omnia, which we launched inthe United States in the fourth quarter of 2019. Additionally, we received approval to commercially launch Senza Omnia inEurope during the second quarter of 2020 and inAustralia inJuly 2020 . The tables below set forth our revenue fromU.S. and international sales the past three years on a quarterly basis and total revenue for each of the past five years. Q1 2018 Q2 2018 Q3 2018 Q4 2018
Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 Revenue from:
(in millions) U.S. sales$ 70.6 $ 79.9 $ 79.6 $ 91.6
16.3 15.5 16.0 16.5 12.2 5.4 17.5 15.1 Total revenue$ 87.6 $ 96.1 $ 95.6 $ 107.9 $ 82.1 $ 93.6 $ 100.2 $ 114.4 $ 87.5 $ 56.4 $ 108.5 $ 109.7 2016 2017 2018 2019 2020 Revenue from: (in millions)
Since our inception, we have financed our operations primarily through equity and debt financings and borrowings under a debt facility. Our accumulated deficit as ofDecember 31, 2020 was$492.8 million . A significant amount of our capital resources has been used to support the development of our Senza products and 73
-------------------------------------------------------------------------------- HF10 therapy, and we have also made a significant investment building ourU.S. commercial infrastructure and sales force to support our commercialization efforts inthe United States . We intend to continue to make significant investments in ourU.S. commercial infrastructure, as well as in research and development (R&D) to develop Senza to treat other chronic pain indications, including conducting clinical trials to support our future regulatory submissions. In order to further enhance our R&D efforts, pursue product expansion opportunities or acquire a new business or products that are complementary to our business, we may choose to raise additional funds, which may include future equity and debt financings. InApril 2020 , we issued$165.0 million aggregate principal amount of 2.75% convertible senior notes due 2025 (the 2025 Notes) in a registered underwritten public offering and an additional$24.8 million aggregate principal amount of such notes pursuant to the underwriters' exercise in full of their option to purchase additional 2025 Notes. The 2025 Notes' interest rates are fixed at 2.75% per annum and are payable semi-annually in arrears onApril 1 andOctober 1 of each year, commencing onOctober 1, 2020 . The total net proceeds from the 2025 Notes, after deducting initial purchase discounts and debt issuance costs, were approximately$183.6 million . In connection with the offering of the 2025 Notes, we entered into convertible note hedge transactions in which we have the option to purchase initially (subject to adjustment for certain specified events) a total of approximately 1.8 million shares of common stock at a price of approximately$105.00 per share. The total cost of the convertible note hedge transactions was$52.4 million . In addition, we sold warrants to certain bank counterparties whereby the holders of the warrants have the option to purchase initially (subject to adjustment for certain specified events) a total of approximately 1.8 million shares of our common stock at a price of$147.00 per share. We received$34.9 million in cash proceeds from the sale of these warrants. The net cost incurred in connection with the convertible note hedge and warrant transactions was$17.5 million . Concurrent with the registered underwritten public offering of the 2025 Notes, we completed an underwritten public offering of common stock and issued 1,868,750 shares of common stock, including 243,750 shares issued pursuant to the exercise in full of the underwriters' option to purchase additional shares. As a result of this public offering of common stock, we received cash proceeds of$147.1 million , net of underwriting discounts and commissions and offering costs. We rely on third-party suppliers for all of the components of our Senza products, and currently for the assembly of these systems. Several of these suppliers are currently single-source suppliers. We have entered into and/or amended several supply agreements in an effort to reinforce our supply chain. We are also required to maintain high levels of inventory, and, as a result, we are subject to the risk of inventory obsolescence and expiration, which may lead to inventory impairment charges. In particular, we have substantially increased our levels of inventory in order to meet our estimated demand inthe United States and, as a result, incur significant expenditures associated with such increases in our inventory. Additionally, as compared to direct manufacturers, our dependence on third-party manufacturers exposes us to greater lead times, increasing our risk of inventory obsolescence. In the third quarter of 2020, we made the strategic decision to vertically integrate the assembly of IPG's, peripherals and various other manufacturing related activities to mitigate our reliance on third-party manufacturers and improve our long-term gross margins. We plan on conducting these manufacturing activities in a facility inCosta Rica , for which our lease will begin inApril 2021 . The integration process is expected to be completed in 2022. Even after this integration process is completed, we expect that we will continue to rely on third-party manufacturers to provide key components to support the assembly process. We may incur significant capital expenditures and implementation costs to initiate the manufacturing operations inCosta Rica .
COVID-19 Pandemic
We are subject to risks related to the public health crises such as the global pandemic associated with COVID-19. InDecember 2019 , a novel strain of coronavirus, SARS-CoV-2, was reported to have surfaced inWuhan, China . Since then, SARS-CoV-2, and the resulting disease COVID-19, has spread to most countries, and all 50 states withinthe United States . The COVID-19 outbreak has negatively impacted, and may continue to negatively impact our operations and revenues and overall financial condition by decreasing the number of Senza systems procedures performed. The number of Senza systems procedures performed, similar to other elective surgical procedures, has decreased as health care organizations globally have prioritized the treatment of patients with COVID-19 and as governments imposed restrictions on the performance of elective procedures. Additionally, overall patient willingness to pursue elective procedures has decreased due to the pandemic. These measures and challenges, however, will likely continue for the duration of the pandemic, which is uncertain, and will reduce our revenue while the pandemic continues. 74 -------------------------------------------------------------------------------- In addition, even as the severity of the pandemic subsides, we expect that demand for Senza system procedures may not return to historic levels as rapidly as originally anticipated as prospective patients may decide to delay the procedure until fully vaccinated for COVID-19. Because the rollout of COVID-19 vaccines has, and could continue to, experience significant delays, this may result in a meaningful delay in patients seeking to have a Senza system trial in the near term. Further, we anticipate that the substantial backlog of patients seeking appointments with physicians and surgeries to be performed at hospitals and ambulatory surgery centers relating to a variety of medical conditions, will result in patients seeking to have Senza system trials or implant procedures performed having to navigate limited provider capacity. We believe these factors may have an adverse effect on the recovery of the global SCS therapy market and, as a result, the amount of time we predict for our sales to recover following the end of the pandemic. Numerous state and local jurisdictions, as well as foreign governments such as theUnited Kingdom andGermany , imposed, and others in the future may impose, "shelter-in-place" orders, quarantines, executive orders and similar government orders and restrictions for their residents to control the spread of COVID-19. In multiple instances in 2020, the governor ofCalifornia , where our headquarters are located, issued a temporary "shelter-in-place" or "stay at home" orders restricting non-essential activities, travel and business operations for an indefinite period of time, subject to certain exceptions for necessary activities. Such orders or restrictions have resulted in our headquarters temporarily closing, work stoppages, slowdowns and delays, travel restrictions and cancellation of events, among other effects, thereby negatively impacting our operations. Other disruptions or potential disruptions include restrictions on our personnel and personnel of partners to travel and access customers for training and case support; delays in approvals by regulatory bodies; delays in product development efforts; and additional government requirements or other incremental mitigation efforts that may further impact our capacity to manufacture, sell and support the use of our Senza systems. While the potential economic impact brought by and the duration of COVID-19 may be difficult to assess or predict, the widespread pandemic has resulted in, and may continue to result in, significant disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity, including our ability to repay our senior convertible notes which are due inJune 2021 andApril 2025 . The COVID-19 pandemic has also resulted in a significant increase in unemployment inthe United States which may continue even after the pandemic. The occurrence of any such events may lead to reduced disposable income and access to health insurance which could adversely affect the number of Senza systems sold after the pandemic has ended. We expect any further shelter-in-place policies and restrictions on elective surgical procedures worldwide to have a substantial near term impact on our revenue. In addition, a recession or market correction resulting from the spread of COVID-19 could materially affect our business and the value of our common stock.
Important Factors Affecting our Results of Operations
In addition to the impact of COVID-19, we believe that the following factors have impacted, and we expect will continue to impact, our results of operations.
Importance of Physician Awareness and Acceptance of Our Products
We continue to invest in programs to educate physicians who treat chronic pain about the advantages of Senza. This requires significant commitment by our marketing team and sales organization, and can vary depending upon the physician's practice specialization, personal preferences and geographic location. Further, we are competing with well-established companies in our industry that have strong existing relationships with many of these physicians. Educating physicians about the advantages of our Senza products, including our latest product, Senza Omnia, which we recently launched both inthe United States and worldwide, and influencing these physicians to use these products to treat chronic pain, is required to grow our revenue.
Reimbursement and Coverage Decisions by Third-Party Payors
Healthcare providers inthe United States generally rely on third-party payors, principally federal Medicare, state Medicaid and private health insurance plans, to cover and reimburse all or part of the cost of our products and the related implant procedure for patients. The revenue we are able to generate from sales of our products depends in large part on the availability of reimbursement from such payors. While we currently have a favorable 75 -------------------------------------------------------------------------------- reimbursement decision from Medicare, decisions of coverage and reimbursement for Senza and the related implant procedure from private health insurance providers can vary. In general, these decisions require that such payors perform analyses to determine if the procedure is medically necessary and if our technology is covered under their existing coverage policies. These payors may deny reimbursement if they determine that the device or procedure was not used in accordance with the payor's coverage policy. A significant component of our commercial efforts includes working with private payors to ensure positive coverage and reimbursement decisions for our products. Favorable reimbursement decisions from Medicare and certain commercial payors, such asAetna , Cigna, Humana,Blue Cross Blue Shield and Kaiser, have contributed to our increase in revenue to date. Although the largest commercial payors and Medicare cover Senza, there can be no assurance that all private health insurance plans will cover the product. A significant number of negative coverage and reimbursement decisions by private insurers may impair our ability or delay our ability to grow our revenue.
Inventory Buildup and
Our products are composed of a substantial number of individual components and, in order to market and sell them effectively, we must maintain high levels of inventory. In particular, since our commercial launch of Senza inthe United States , we have continued to add suppliers to fortify our supply chain and we have maintained increased levels of inventory. As a result, a significant amount of our cash used in operations has been associated with maintaining these levels of inventory. There may also be times in which we determine that our inventory does not meet our product requirements, as was the case for the years endedDecember 31, 2020 and 2019, wherein we recorded a write-down of inventory of$2.7 million and$1.6 million , respectively. Further, the manufacturing process for our products requires lengthy lead times, during which components may become obsolete. We may also over- or underestimate the quantities of required components, in which case we may expend extra resources or be constrained in the amount of end product that we can produce. These factors subject us to the risk of inventory obsolescence and expiration, which may lead to inventory impairment charges. As we release later generations of products that contain advancements or additional features, the earlier generations may become obsolete, as was the case in the year endedDecember 31, 2020 , when we recorded a charge of$2.6 million . For the year endedDecember 31, 2019 , we recorded a charge of$3.6 million related to the cancellation of firm purchase commitments.
Investment in Research and Clinical Trials
We intend to continue investing in R&D to expand into new indications and chronic pain conditions, as well as develop product enhancements to improve outcomes and enhance the physician and patient experience. For example, we commenced commercial launches of Surpass, our surgical lead product family in early 2017 and Senza II SCS System in late 2017. Most recently, we launched our next generation product platform, Senza Omnia, inthe United States in late 2019, inEurope during the second quarter of 2020 and inAustralia inJuly 2020 . We are continuing to invest in product improvements to Senza, including enhanced MRI capabilities and a next generation IPG. While R&D and clinical testing are time consuming and costly, we believe expanding into new indications, implementing product improvements and continuing to demonstrate HF10 efficacy, safety and cost effectiveness through clinical data are all critical to increasing the adoption of HF10 therapy. We initiated two randomized controlled trials in 2018, SENZA-PDN and SENZA-NSRBP, which evaluate HF10 therapy for the treatment of painful diabetic neuropathy and non-surgical refractory back pain, respectively. InJanuary 2020 , we presented the three-month data from our SENZA-PDN study at NANS 2020, which was the largest SCS randomized controlled trial conducted to date for PDN. InJanuary 2021 , we presented the six-month data from our SENZA-PDN study at NANS 2021. With regard to the SENZA-NSRBP study, we presented the three-month primary endpoint results inJanuary 2021 at NANS 2021, representing the first release of data from this randomized controlled trial. Both the SENZA-PDN and SENZA-NSRBP studies are ongoing, and further data will be presented and published in leading journals as the data becomes available.
We are continuing to make investments in building our
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to grow their network of accounts and produce sales results. Successfully recruiting and training a sufficient number of productive sales representatives has been required to achieve growth at the rate we expect.
Access to Hospital Facilities
Inthe United States , in order for physicians to use our products, the hospital facilities where these physicians treat patients often require us to enter into purchasing contracts directly with the hospital facilities or with the Group Purchasing Organizations of which the hospital facilities are members. This process can be lengthy and time-consuming and requires extensive negotiations and management time. InEurope , we may be required to engage in a contract bidding process in order to sell our products, where the bidding processes are only open at certain periods of time, and we may not be successful in the bidding process.
We Do Not Expect to Continue to Experience Our Historical Worldwide Revenue Growth Rates
Our worldwide revenue has increased from$18.2 million for the year endedDecember 31, 2012 to$362.0 million for the year endedDecember 31, 2020 . SinceMay 2015 when we commenced the commercial launch of Senza in theU.S. , our worldwide revenue growth has been substantially driven by sales of Senza inthe United States . Over the past two years, our revenue growth in international markets has slowed significantly. Although we had experienced significant growth in sales inthe United States for several years following our launch, we do not expect to continue that historic rate of revenue growth inthe United States or on a worldwide basis. The COVID-19 pandemic has impacted our revenue in 2020 and we expect continued impact in 2021 as the pandemic continues. Further, due to a number of factors, including governmental reimbursement constraints in theEuropean SCS market limiting the number of annual SCS implants, market pressure inAustralia and our current penetration in these markets, we expect minimal, if any, growth in our international markets.
Critical Accounting Policies, Significant Judgments and Use of Estimates
Our management's discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America (U.S. GAAP). The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our critical accounting policies and estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions. We believe that the estimates, judgments and assumptions involved in the accounting for revenue recognition, inventory, stock-based compensation, income taxes and allowance for doubtful accounts have the greatest potential impact on our consolidated financial statements, so we consider these to be our critical accounting policies. We discuss below the critical accounting estimates associated with these policies. Historically, our estimates, judgments, and assumptions relative to our critical accounting policies have not differed materially from actual results. Our significant accounting policies are more fully described in Note 2, Summary of Significant Accounting Policies, of Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report. 77 --------------------------------------------------------------------------------
Revenue
OnJanuary 1, 2018 , we adopted the new accounting standard ASC 606, Revenue from Contracts with Customers, using the modified retrospective method applied to contracts which were not completed as of that date. Results for reporting periods beginning afterJanuary 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605, Revenue Recognition. Under ASC 606, assuming all other revenue recognition criteria have been met, we will recognize revenue earlier for arrangements where we have satisfied its performance obligations but have not issued invoices. These amounts are recorded as unbilled receivables, which are included in accounts receivable on the consolidated balance sheet, as we have an unconditional right to payment at the end of the applicable period.
Revenue is recognized when obligations under the terms of a contract with customers are satisfied, which occurs with the transfer of control of the Company's goods to its customers. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring the goods.
For a majority of sales, where our sales representative delivers our product at the point of implantation at hospitals or medical facilities, we recognize revenue upon completion of the procedure and authorization, which represents the point in time when control transfers to the customers. For the remaining sales, which are sent from the Company's distribution centers directly to hospitals and medical facilities, as well as distributor sales, where product is ordered in advance of an implantation, the transfer of control occurs at the time of shipment of the product. These customers are obligated to pay within specified terms regardless of when or if they ever sell or use the products. We do not offer rights of return or price protection. To the extent that we have a post-delivery obligation, such as programming devices that have been delivered as part of a direct-ship order, we defer revenue and the associated cost of goods sold associated with the post-delivery obligation only if the amounts are deemed material.
For further discussion on revenue recognition see Note 3, Revenue, of Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report.
Inventory Valuation
We contract with third parties for the manufacturing and packaging of all of the components of our Senza products. We plan the manufacture of our systems based on estimates of market demand. The nature of our business requires that we maintain sufficient inventory on hand to meet the requirements of our customers. Inventories are stated at the lower of cost or net realizable value. Cost is determined using the standard cost method, which approximates the first-in, first-out basis. Net realizable value is determined as the prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.
We regularly review inventory quantities compared to forecasted sales to record a provision for excess and obsolete inventory when appropriate. Inventory write-downs are recorded for excess and obsolete inventory. We estimate forecasted sales by considering:
• product acceptance in the marketplace; • customer demand; • historical sales; • product obsolescence; and • technological innovations.
Any inventory write-downs are recorded in cost of revenue within the statements of operations during the period in which such write-downs are determined necessary by management.
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Stock-Based Compensation
Stock-based compensation costs related to stock options granted to employees are measured at the date of grant based on the estimated fair value of the award, net of estimated forfeitures. We estimate the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. The fair value is recognized on a straight-line basis over the requisite service period of the stock option award, which is generally the vesting term of four years, with the exception of performance based stock option awards, whose fair value is recognized as expenses when it is determined that achieving the performance metrics are probable. The Black-Scholes option-pricing model requires the use of highly subjective assumptions which determine the fair value of stock-based awards. The assumptions used in our option-pricing model represent management's best estimates. These estimates are complex, involve a number of variables, uncertainties and assumptions and the application of management's judgment, so that they are inherently subjective. If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the future. These assumptions are estimated as follows: Risk-Free Interest Rate. We base the risk-free interest rate used in the Black-Scholes valuation model on the implied yield available onU.S. Treasury zero-coupon issues with an equivalent remaining term of the options for each option group.
Expected Term. The expected term represents the period that our stock-based awards are expected to be outstanding. We utilize our historical data for the calculation of expected term.
Volatility. We have incorporated our historical stock trading volatility with those of our peer group for the calculation of volatility. Industry peers consist of several public companies in the medical device technology industry with comparable characteristics including enterprise value, risk profiles and position within the industry. We regularly evaluate our peer group to assess changes in circumstances where identified companies may no longer be similar to us, in which case, more suitable companies whose share prices are publicly available would be utilized in the calculation.
Dividend Yield. The expected dividend assumption is based on our current expectations about our anticipated dividend policy. We currently do not expect to issue any dividends.
In addition to assumptions used in the Black-Scholes option-pricing model, we must also estimate a forfeiture rate to calculate the stock-based compensation for our awards. We will continue to use judgment in evaluating the assumptions related to our stock-based compensation on a prospective basis. As we continue to accumulate additional data, we may have refinements to our estimates, which could materially impact our future stock-based compensation expense. In 2015, we began issuing restricted stock units (RSUs). We account for stock-based compensation for the RSUs at their fair value, based on the closing market price of our common stock on the grant date. These costs are recognized on a straight-line basis over the requisite service period, which is generally the vesting term of four years. In 2016, we granted performance based RSUs to our former CEO that only vest upon the achievement of specific operational performance criteria. The stock-based compensation for these performance based RSUs are recognized as expenses when it is determined that achieving the performance metrics are probable. Upon the former CEO's resignation from the Company inMarch 2019 , the unvested shares subject to this award as of the separation date have been cancelled. In 2019, we granted RSUs to our current CEO, which entitle him to receive a number of shares of our common stock based on our stock price performance compared to a specified target composite index over a three-year period. The number of shares to be issued upon vesting ranges from zero to 3.5 times the number of RSUs granted, depending on the relative performance of our common stock compared to the targeted composite index. The fair value of these grants is determined by using the Monte Carlo simulation model, which is based on a discounted cash flow approach, and requires inputs such as expected volatility of our stock price, expected volatility 79 -------------------------------------------------------------------------------- of the targeted composite index, correlation between the changes in our stock price and the target composite index, risk-free interest rate and expected dividends. The expected volatility of our stock and the target composite index is based on the historical data. Correlation is based on the historical relationship between our stock price and the target composite index. The risk-free interest rate is based upon the treasury yield consistent with the vesting term of the grant. The expected dividend yield is zero. Stock-based compensation for these restricted stock units is recognized over the specified performance measurement. We estimate the fair value of the rights to purchase shares by employees under our Employee Stock Purchase Plan using the Black-Scholes option pricing formula. Our Employee Stock Purchase Plan provides for consecutive six-month offering periods and we use our own historical volatility data in the valuation.
Income Tax
We recognize deferred income taxes for temporary differences between the basis of assets and liabilities for financial statement and income tax purposes. We periodically evaluate the positive and negative evidence bearing upon realizability of our deferred tax assets. Based upon the weight of available evidence, which includes our historical operating performance, reported cumulative net losses since inception and difficulty in accurately forecasting our future results, we maintained a full valuation allowance on our netU.S. federal and state deferred tax assets as ofDecember 31, 2020 and 2019. We intend to maintain a full valuation allowance on the federal and state deferred tax assets until sufficient positive evidence exists to support reversal of the valuation allowance. As ofDecember 31, 2020 , we had federal net operating loss carryforwards (NOLs) of$497.5 million , of which$238.5 million was generated in fiscal year 2018 and thereafter, which can be carried forward indefinitely under the 2017 Tax Act, as well as state NOLs of$272.8 million , of which$41.5 million may be carried forward indefinitely. If not utilized, the remaining federal NOLs will begin to expire in 2026 and the state NOLs will begin to expire 2021. We have no foreign NOL carryforwards. We also have federal research tax credit carryforwards that will begin to expire in 2026 andCalifornia research tax credits that do not expire. Realization of these NOL and research tax credit carryforwards depends on future income, and there is a risk that our existing carryforwards could expire unused and be unavailable to reduce future income tax liabilities, which could materially and adversely affect our results of operations. In addition, under Section 382 of the Internal Revenue Code of 1986, as amended (the Code) our ability to utilize NOL carryforwards or other tax attributes such as research tax credits, in any taxable year may be limited if we experience, or have experienced, a Section 382 "ownership change." A Section 382 "ownership change" generally occurs if one or more stockholders or groups of stockholders, who own at least 5% of our stock, increase their ownership by a greater than 50 percentage point change (by value) over a rolling three-year period. Similar rules may apply under state tax laws. No deferred tax assets have been recognized on our balance sheet related to our NOLs and tax credits, as they are fully reserved by a valuation allowance. We experienced a Section 382 "ownership change" as a result of ourJune 2015 underwritten public offering. We currently estimate this "ownership change" will not inhibit our ability to utilize our NOLs. However, we may, in the future, experience one or more additional Section 382 "ownership changes" as a result of subsequent changes in our stock ownership, some of which changes are outside our control. If so, we may not be able to utilize a material portion of our NOLs and tax credits even if we achieve profitability and generate sufficient taxable income. If we are limited in our ability to use our NOLs and tax credits in future years in which we have taxable income, we will pay more taxes than if we were able to fully utilize our NOLs and tax credits. This could materially and adversely affect our results of operations. We record unrecognized tax benefits as liabilities and adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the unrecognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available. Our policy is to recognize interest and penalties related to income taxes as a component of income tax expense. A nominal amount of interest and penalties have been recognized in the statements of operations and comprehensive loss in 2020 and 2019. No interest or penalties related to income taxes have been recognized in the statements of operations and comprehensive loss in 2018. 80 -------------------------------------------------------------------------------- OnDecember 22, 2017 , the 2017 Tax Cuts and Jobs Act (the 2017 Tax Act) was enacted into law. The recorded impact for the effects of the 2017 Tax Act is based on our current knowledge, assumptions and interpretations of available guidance. We elected to account for Global Intangible Low-Taxed Income (GILTI) as a current period expense when incurred. We will continue to monitor the issuance of additional regulatory or accounting guidance and record any necessary adjustments in the period for which additional guidance is issued.
Allowance for Doubtful Accounts
We make estimates as to the overall collectability of accounts receivable and provide an allowance for accounts receivable considered uncollectible based on current expected credit losses. We specifically analyze accounts receivable based on historical bad debt experience, customer concentrations, customer credit-worthiness, the age of the receivable, current economic trends, and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. We record the adjustment in general and administrative expense. Our accounts receivable balance was$77.7 million , net of allowance of$3.0 million , as ofDecember 31, 2020 and$82.8 million , net of allowance of$0.8 million , as ofDecember 31, 2019 .
Components of Results of Operations
Revenue
Our revenue is generated primarily from sales to two types of customers: hospitals and outpatient medical facilities, with each being served primarily through a direct sales force. Sales to these entities are billed to, and paid by, the hospitals and outpatient medical facilities as part of their normal payment processes, with payment received by us in the form of an electronic transfer, check or credit card payment. Product sales to third-party distributors are billed to and paid by the distributors as part of their normal payment processes, with payment received by us in the form of an electronic transfer.U.S. revenue is generally recognized after our sales representatives deliver our product at the point of implantation and upon the completion and authorization of the implant procedure. In response to competitive practices and pressures, we have offered some volume price discounting for larger orders, where products are ordered in advance of an implantation and revenue is recognized when the transfer of control occurs at the time of shipment. Revenue from sales of our Senza products fluctuate based on the selling price of the system, as the average sales price of a system varies geographically and by the type of system sold, and based on the mix of sales by geography. Our revenue from international sales can also be significantly impacted by fluctuations in foreign currency exchange rates, as our sales are denominated in the local currency in the countries in which we sell our products. We expect our revenue to fluctuate from quarter to quarter due to a variety of factors, including seasonality. For example, the industry generally experiences lower revenues in the first and third quarters of the year and higher revenues in the fourth quarter. Our revenue has historically been impacted by these industry trends. Further, the impact of the buying patterns and implant volumes of hospitals and medical facilities, and third-party distributors may vary, and as a result could have an effect on our revenue from quarter to quarter. The normal seasonal fluctuations of our revenue have been disrupted by the COVID-19 pandemic, as we have seen significant fluctuations in our quarterly revenue based on current events directly caused by the pandemic. We have recorded revenue of approximately$173.3 million ,$263.5 million ,$321.8 million ,$326.0 million and$311.9 million for the years endedDecember 31, 2016 , 2017, 2018, 2019 and 2020, respectively, for sales inthe United States . We anticipate that our total revenue will increase as we continue our commercialization inthe United States .
Cost of Revenue
We utilize contract manufacturers for the production of Senza products. Cost of revenue consists primarily of acquisition costs of the components of Senza, manufacturing overhead, royalty payments, scrap and inventory excess and obsolescence charges, as well as distribution-related expenses, such as logistics and shipping costs, net of costs charged to customers.
81 -------------------------------------------------------------------------------- We calculate gross margin as revenue less cost of revenue divided by revenue. Our gross margin has been and will continue to be affected by a variety of factors, but primarily by our average sales price and the costs to have our products manufactured. While costs are primarily incurred inU.S. dollars, international revenue may be impacted by the appreciation or depreciation of theU.S. dollar, which may impact our overall gross margin. Our gross margin is also affected by our ability to reduce manufacturing costs as a percentage of revenue.
Operating Expenses
Our operating expenses consist of R&D expense, and sales, general and administrative (SG&A) expense. Personnel costs are the most significant component of operating expenses and consist primarily of salaries, bonus incentives, benefits, stock-based compensation and sales commissions.
Research and Development. R&D costs are expensed as incurred. R&D expense consists primarily of personnel costs, including salary, employee benefits and stock-based compensation expenses for our R&D employees. R&D expense also includes costs associated with product design efforts, development prototypes, testing, clinical trial programs and regulatory activities, contractors and consultants, equipment and software to support our development, facilities and information technology. We expect product development expenses to increase in absolute dollars as we continue to develop product enhancements to Senza. Our R&D expenses may fluctuate from period to period due to the timing and extent of our R&D and clinical trial expenses. Sales, General and Administrative. SG&A expense consists primarily of personnel costs, including salary, employee benefits and stock-based compensation expenses for our sales and marketing personnel, including sales commissions, and for administrative personnel that support our general operations, such as information technology, executive management, financial accounting, customer service and human resources personnel. We expense commissions at the time of the sale. SG&A expense also includes costs attributable to marketing, as well as travel, intellectual property and other legal fees, financial audit fees, insurance, fees for other consulting services, depreciation and facilities. We significantly increased the size of our sales presence worldwide during 2018 and 2019, and we have maintained the overall size of our sales organization in 2020. In the last three years, we have increased marketing spending in order to generate additional sales opportunities. Additionally, we have made substantial investments in ourU.S. commercial infrastructure to support our commercialization efforts inthe United States . We expect SG&A expenses to decrease as a percent of revenue as we engage in activities that leverage our existing sales and marketing personnel to support the commercialization of our products inthe United States . During 2018, 2019 and 2020, we had experienced significant legal expenses associated with our intellectual property litigation with Boston Scientific. We anticipate significant continued expenses associated with these legal activities. Additionally, we continue to incur significant expenses related to audit, legal, regulatory and tax-related services associated with maintaining compliance with exchange listing andSEC requirements, including compliance under the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act), director and officer insurance premiums and investor relations costs associated with being a public company. Our SG&A expense may fluctuate from period to period due to the seasonality of our revenue, the timing and extent of our SG&A expense, and the direct impact of the COVID-19 pandemic on certain discretionary spend items such as travel and trade shows.
Interest Income and Interest Expense
Interest income consists primarily of interest income earned on our investments and interest expense consists of interest paid on our outstanding debt and the amortization of debt discount and debt issuance costs.
Other Income (Expense), Net
Other income (expense), net consists primarily of foreign currency transaction
gains and losses and the gains and losses from the remeasurement of
foreign-denominated balances to the
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Provision for Income Taxes
The provision for income taxes consists primarily of income taxes in foreign jurisdictions in which we conduct business as well as states where we have determined we have state nexus. We maintain a full valuation allowance for substantially all of our deferred tax assets including net operating loss (NOL) carryforwards and federal and state tax credits.
Recent Accounting Pronouncements
For recent accounting pronouncements, see Note 2, Summary of Significant Accounting Policies, of Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report.
Comparison of the Years Ended
Revenue, Cost of Revenue, Gross Profit and Gross Margin
Years Ended December 31, 2020 2019 Change (in thousands) Revenue$ 362,048 $ 390,255 $ (28,207 ) Cost of revenue 112,146 121,905 (9,759 ) Gross profit$ 249,902 $ 268,350 $ (18,448 ) Gross margin 69% 69% 0% Revenue. Revenue decreased to$362.0 million in 2020 from$390.3 million in 2019, a decrease of$28.2 million , or 7%. The decrease in revenue was a result of a worldwide decline in procedure volume, as healthcare systems diverted resources to meet the increasing demands of managing COVID-19 pandemic and as elective procedures were significantly limited and, in many places, halted entirely during portions of the year. Cost of Revenue, Gross Profit and Gross Margin. Cost of revenue decreased to$112.1 million in 2020 from$121.9 million in 2019, a decrease of$9.8 million , or 8%. This decrease was primarily due to a net$9.0 million decrease in the costs of manufactured product components, as well as a$1.1 million decrease related to product accessories used as part of developing our operational infrastructure in theU.S. Gross profit decreased to$249.9 million in 2020 from$268.4 million in 2019, a decrease of$18.4 million , or 7%. Gross profit as a percentage of revenue, or gross margin, remained steady at 69% in 2020 and 2019. Operating Expenses Years Ended December 31, 2020 2019 % of % of Total Total Change Amount Revenue Amount Revenue Amount (in thousands) Operating expenses: Research and development$ 45,600 13%$ 59,017 15%$ (13,417 ) Sales, general and administrative 267,154 74% 305,812 78% (38,658 ) Total operating expenses$ 312,754 86%$ 364,829 93%$ (52,075 ) Research and Development (R&D) Expenses. R&D expenses decreased to$45.6 million in 2020 from$59.0 million in 2019, a decrease of$13.4 million , or 23%. The decrease was primarily due to a decrease in clinical and development expenses of$7.9 million , personnel and consulting costs of$3.0 million and travel expenses of$1.9 million . 83
-------------------------------------------------------------------------------- Sales, General and Administrative (SG&A) Expenses. SG&A expenses decreased to$267.2 million in 2020 from$305.8 million in 2019, a decrease of$38.7 million , or 13%. This decrease was primarily due to a decrease in personnel costs of$22.0 million , travel and training expenses of$10.9 million and healthcare professional-related expenses of$7.8 million , which were partially offset by increased bad debt expense of$1.4 million and software expenses of$1.3 million .
Interest Income, Interest Expense, Other Income (Expense), Net, Loss on Extinguishment of Debt and Provision for Income Taxes
Years Ended December 31, 2020 2019 Change (in thousands) Interest income$ 2,956 $ 6,020 $ (3,064 ) Interest expense (21,806 ) (10,931 ) (10,875 ) Other income (expense), net (495 ) (697 ) 202 Provision for income taxes 868 1,599 (731 ) Interest Income. Interest income decreased to$3.0 million in 2020 from$6.0 million in 2019, primarily as a result of a decrease in our investment yield rate. Interest Expense. Interest expense increased to$21.8 million in 2020 from$10.9 million in 2019. We recorded$10.3 million of expenses related to the interest and amortization of debt discount and debt issuance costs related to the 2025 Notes, which were issued inApril 2020 . There was also a$0.6 million increase in the amortization of debt discount and debt issuance costs related to the 2021 Notes. Other Income (Expense), Net. Other income (expense), net was primarily comprised of foreign currency transaction gains and losses, and the gains and losses from the remeasurement of foreign-denominated balances. We recorded a net gain of$41,000 in 2020 and a net loss of$0.6 million in 2019 in relation to the two items previously mentioned. Our remeasurement gains and losses are affected by changes in the foreign currency translation rates of the countries in which we conduct business. Additionally, in 2020, we recorded a net expense of$0.4 million for the impairment charge related to the value of the right to acquire a privately-held company. Income Tax Expense. Income tax expense was$0.9 million in 2020 and$1.6 million in 2019. Our income tax expense is associated primarily with foreign and state income taxes. We continue to generate tax losses forU.S. federal and state tax purposes and have NOL carryforwards creating a deferred tax asset. We have a full valuation allowance on the majority of our deferred tax assets. The change in income tax expense was primarily due to changes in foreign income taxes on profits realized by our foreign subsidiaries.
Liquidity, Capital Resources and Plan of Operations
Since our inception, we have financed our operations through private placements of preferred stock, the issuance of common stock in our IPO inNovember 2014 and our underwritten public offering inJune 2015 , borrowings under our credit facility, which we have subsequently repaid, and theJune 2016 issuance of convertible senior notes due 2021. InApril 2020 , we completed a concurrent underwritten public offering of common stock and convertible senior notes due 2025. Our total net proceeds from these transactions, after giving effect to the note hedge transactions and warrant transactions and associated offering expense was$313.3 million . AtDecember 31, 2020 , we had cash, cash equivalents and short-term investments of$588.0 million . Based on our current operating plan, we expect that our cash and cash equivalents on hand, together with the anticipated funds from the collection of our receivables, will be sufficient to fund our operations through at least the next 12 months. We expect to incur continued expenditures in the future in support of our commercial infrastructure and sales force. In addition, we intend to continue to make investments in the further development of our Senza product platform and HF10 therapy for the treatment of other chronic pain conditions, including ongoing R&D programs and conducting clinical trials. Further, we expect to expend significant cash resources pursuing and defending our ongoing intellectual property lawsuits. In order to further enhance our R&D efforts, pursue product expansion 84
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opportunities or acquire a new business or products that are complementary to our business, we may choose to raise additional funds.
We may continue to seek funds through equity or debt financings, or through other sources of financing. Adequate additional funding may not be available to us on acceptable terms or at all. Our failure to raise capital in the future could have a negative impact on our financial condition and our ability to pursue our business strategies. Should we choose to raise additional capital, the requirements will depend on many factors, including:
• the impact of the ongoing COVID-19 pandemic and any recession or other
market correction resulting from the pandemic;
• the costs related to the continued commercialization of our products in
manufacturing and distribution;
• the cost of filing, prosecuting, defending and enforcing any patent claims
and other intellectual property rights, including, in particular, the
costs of enforcing our patent rights in the action we filed against
Scientific and in defending against Boston Scientific's action against us;
• the R&D activities we intend to undertake in order to expand the chronic
pain indications and product enhancements that we intend to pursue;
• whether or not we pursue acquisitions or investments in businesses,
products or technologies that are complementary to our current business;
• the degree and rate of market acceptance of our products in the United
States and elsewhere;
• changes or fluctuations in our inventory supply needs and forecasts of our
supply needs;
• costs related to the development of our internal manufacturing capabilities;
• our need to implement additional infrastructure and internal systems;
• our ability to hire additional personnel to support our operations as a
public company; and
• the emergence of competing technologies or other adverse market developments.
Our success depends, in part, upon our ability to establish a competitive position in the neuromodulation market by securing broad market acceptance of our HF10 therapy and our Senza product platform for the treatment of chronic pain conditions. Any product we develop that achieves regulatory clearance or approval will have to compete for market acceptance and market share. We face significant competition inthe United States and internationally, which we believe will intensify as we continue to commercialize inthe United States . For example, our major competitors, Medtronic, Boston Scientific and Abbott Laboratories, each have approved neuromodulation systems in at leastthe United States ,Europe andAustralia and have been established for several years. In addition to these major competitors, we may also face competition from other emerging competitors and smaller companies with active neuromodulation system development programs that may emerge in the future. If we are unable to raise, or have access, to sufficient funds when needed, we may be required to delay, reduce, or terminate some or all of our commercial development plans. The following table sets forth the primary sources and uses of cash for each of the periods presented below: Years Ended December 31, 2020 2019 2018 (in thousands) Net cash provided by (used in) Operating activities$ 1,191 $ (50,225 ) $ (5,708 ) Investing activities (369,868 ) 32,330 6,433 Financing activities 346,905 32,093 7,754 Effect of exchange rate on cash flows 646 259 (258 ) Net increase (decrease) in cash, cash equivalents and restricted cash$ (21,126 ) $ 14,457 $ 8,221 85
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Cash Provided by (Used in) Operating Activities. Net cash provided by operating activities was$1.2 million for the year endedDecember 31, 2020 . The cash provided by operating activities for the year endedDecember 31, 2020 was affected by a decrease in prepaids and other assets of$7.5 million , a decrease in accounts receivable of$3.4 million , and a decrease in inventory of$2.5 million , as well as non-cash stock based compensation expense of$42.7 million , non-cash interest expense of$14.9 million , inventory write-down of$5.4 million , depreciation and amortization of$4.8 million , amortization of operating lease assets of$3.4 million and provision of doubtful accounts of$2.2 million . These changes were offset by a net loss of$83.1 million for the year and a decrease in long term liabilities of$2.4 million . Net cash used in operating activities were$50.2 million , and$5.7 million for the years endedDecember 31, 2019 and 2018, respectively, primarily due to the net losses during the periods of$103.7 million and$49.2 million , respectively. The cash used in operating activities for the year endedDecember 31, 2019 was affected by an increase in accounts receivable of$2.2 million and an increase in prepaids and other assets of$3.2 million . These changes were offset by a net increase in accounts payable and accrued liabilities of$5.7 million and write-down of inventories of$1.5 million , as well as non-cash stock based compensation expense of$41.7 million , non-cash interest expense of$7.9 million , depreciation and amortization of$4.6 million and amortization of operating lease assets of$3.2 million . The cash used in operating activities for the year endedDecember 31, 2018 was affected by an increase in accounts receivable of$12.2 million and an increase in other assets of$2.6 million . These changes were offset by a net increase in accounts payable and accrued liabilities of$4.9 million and a decrease in inventory of$3.8 million , as well as non-cash stock based compensation expense of$36.6 million , non-cash interest expense of$7.4 million , depreciation and amortization of$3.9 million and a write-down of inventory of$2.0 million . Cash Used in Investing Activities. Investing activities consisted primarily of changes in investment balances, including purchases and maturities of short-term investments, and purchases of property and equipment. For the year endedDecember 31, 2020 , we had net purchases from the sales and maturity of investments of$371.3 million and purchases in property and equipment of$6.0 million , offset by the receipt of$7.5 million for the repayment of secured convertible notes from a private company. For the year endedDecember 31, 2019 , we had net proceeds from the sales and maturity of investments of$43.3 million , offset by purchases in property and equipment of$3.5 million . Additionally, we purchased secured convertible notes totaling$7.5 million in the year endedDecember 31, 2019 . For the year endedDecember 31, 2018 , we had net proceeds from the sales and maturity of investments of$14.7 million , which was offset by purchases in property and equipment of$8.2 million . Cash Provided by Financing Activities. Cash provided by financing activities was$346.9 million for the year endedDecember 31, 2020 . The majority of this cash was from the proceeds of$183.6 million , net of issuance costs, from the 2025 Notes and the proceeds of$147.1 million , net of issuance costs, from the concurrent public common stock offering. The cash received from these activities was offset by a net$17.5 million cost of convertible note hedge and warrant transactions, which included the$52.4 million purchase of convertible note hedges and proceeds of$34.9 million related to the sale of warrants. Additionally, we received cash of$33.6 million from the issuance of common stock to employees pursuant to the exercise of employee stock options and our employee stock purchase plan, net of tax withholdings. Cash provided by financing activities was$32.1 million for the year endedDecember 31, 2019 , primarily due to the cash received from the issuance of common stock to employees of$35.2 million pursuant to the exercise of employee stock options and our employee stock purchase plan, offset by$3.1 million for tax withholdings paid on behalf of employees for net share settlement. Cash provided by financing activities was$7.8 million for the year endedDecember 31, 2018 , primarily due to the cash received from the issuance of common stock to employees of$9.5 million pursuant to the exercise of employee stock options and our employee stock purchase plan.
Contractual Obligations and Commitments
We have lease obligations primarily consisting of operating leases for our principal offices, which expire as set forth below, and for our warehouse space that expires in 2022. In 2020, we also entered into an operating lease for a manufacturing facility with a planned commencement date ofApril 2021 and a planned expiration date ofJune 2031 . InMarch 2015 , we entered into a lease agreement for approximately 50,740 square feet of office space located inRedwood City, California for a period beginning inJune 2015 and ending inMay 2022 , with initial annual 86 -------------------------------------------------------------------------------- payments of approximately$2.0 million , increasing to$2.4 million annually in the final year of the lease term. InDecember 2016 , we entered into a first amendment to the lease for an additional approximately 49,980 square feet of office space adjacent to the premises under the original lease (the Expansion Premises) with initial annual payments of$1.2 million , increasing to$2.9 million in the final year of the amended lease term. The lease for the Expansion Premises commenced onJune 1, 2018 . The first amendment also extends the lease term for the original premises to terminate on the same date as the amended lease, which isMay 31, 2025 . InApril 2017 , we entered into a second amendment to the lease for a temporary space of approximately 8,171 square feet for a period beginning inMay 2017 , and which ended onJune 1, 2018 , the Commencement Date of the Expansion Premises. See Note 7, Commitments and Contingencies, of Notes to Consolidated Financial Statements for additional information.
In
InFebruary 2017 , we entered into a separate non-cancellable facility lease for warehouse space beginningMarch 1, 2017 throughFebruary 28, 2022 , under which we are obligated to pay approximately$0.4 million in lease payments over the term of the lease. InAugust 2020 , we entered into a lease for approximately 35,411 square feet of manufacturing space to begin inApril 2021 and to last throughJune 2031 at a facility inCosta Rica , under which we are obligated to pay approximately$3.9 million in lease payments over the term of the lease. We plan to use this facility to build-out certain manufacturing capabilities so that we can vertically integrate the assembly of IPG's, peripherals and various other manufacturing related activities. We have also entered into a service agreement for which we are committed to pay$2.5 million in each of the next four years over the term of the service agreement, as well as a license agreement for which we are committed to pay$0.2 million over the remaining term of license agreement. As ofDecember 31, 2020 , our contractual obligations related to the 2021 Notes are payments of interest and principal totaling$174.0 million due inJune 2021 . Our contractual obligations related to the 2025 Notes are payments of interest of$5.2 million due each year from 2021 through 2024, and payments of interest and principal totaling$192.4 million due in 2025.
The following table summarizes our contractual obligations as of
Payment date by period Total Less than 1 year 1
to 3 years 4 to 5 years More than 5 years
(in thousands) Notes payable, including contractual interest$ 387,241 $ 179,228$ 10,436 $ 197,577 $ - Lease obligations 28,004 5,253 11,510 8,861 2,380 Purchase obligations 10,228 2,607 5,114 2,507 - Total$ 425,473 $ 187,088 $
27,060$ 208,945 $ 2,380
Off-Balance Sheet Arrangements
ThroughDecember 31, 2020 , we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. For information regarding indemnification obligations, refer to Note 7, Commitments and Contingencies, of Notes to the Consolidated Financial Statements within Part II, Item 8 of this Annual Report. 87 --------------------------------------------------------------------------------
Segment Information
We have one primary business activity and operate as one reportable segment.
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